Interest Rates Steady after Bank of Canada Meeting

Thank you, Donald Trump. Those unlikely words from Canadian mortgage leaders are the result of the economic uncertainty created by Trump’s politicization of the renegotiation of NAFTA. This fact, combined with the slowdown in domestic spending at the end of 2017 that caught the Bank of Canada by surprise, is primarily to blame for interest rates holding steady after the March Bank of Canada meeting. The issue itself isn’t a surprise since it was cited as a future concern in January when interest rates were raised 0.25%. The Bank of Canada’s reasoning is that trade uncertainty may put a damper on business activity. And that’s a serious problem given that business reinvestment in transportation and production equipment is a major source of economic growth right now, while housing and consumer spending are on the decline. The slowdown in consumer spending is blamed on the prior rate hikes putting increasing pressure on over-indebted Canadian households trying to service existing debt. Without business investments in equipment and infrastructure, Canada’s economy would have done much worse than its 1.7% growth in the last quarter of 2017. This is a drop from the nearly 4% growth at the start of the year and why it finished with an annual GDP expansion of 3%. The winter 2017 GDP rate is somewhat below the Bank of Canada’s goal of 2.5% but within its non-inflationary speed limit. Sluggish exports and a surge of imports get part of the blame. So the Bank of Canada kept the benchmark lending rate unchanged at 1.25%. Markets still expect interest rates to increase in the summer or toward the end of the year due to Canada’s economy coming raging back last year. Some investment gurus like Sebastien Lavoie at Laurentian Bank Securities think interest rates will only be hiked a quarter point once in 2018. If GDP remains below the 2% mark, then there’s certainly no need to raise rates as there was in 2017, when the economy was growing twice as fast as an economy should without stoking price inflation. Unemployment remains low. However, wages are only slowly starting to go up after years of stagnation. Poloz has said repeatedly he’d let the economy run hot longer if it led to wage growth. This furthers the idea that an interest rate hike would come later rather than sooner. That’s especially true when wage growth is far below the rates you’d expect if there was no slack in the labour market. As always, if you have any questions or concerns about the Bank of Canada interest rates, please reach out to me at 403-241-3255